Small businesses should shop around for credit

published 10 August 2018

908_MW_P28_SB — It can be costly if you let your staff loose with the plastic

Credit cards can be a useful way to manage business expenses.

If your business needs a credit card, be as disciplined about shopping around for the best deal as you would with your own finances. Corporate credit cards can be a convenient way of managing the more modest day-to-day business expenses, but can also be costly and you must think carefully about who will have access to this plastic and in what circumstances.

Indeed, you may not need a credit card at all. For firms with only small expenses and limited numbers of people who need access to the account, a pre-paid business card may be a better option. With this sort of card, you never borrow any money instead, you load it with cash that users can then spend as needed.

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This is a good way to keep spending under tight control. Cards can be issued to any staff who need one, but they won't be able to spend more than has been loaded on to the account. You can also set limits as to how such cards are used, such as ruling out withdrawals from cash machines. You'll receive statements showing how all the different cards have been used.

These accounts charge in different ways, with a combination of set-up fees, transaction charges and exchange costs if you use them overseas. Capital on Tap, Cashplus and Caxton FX are the most competitive suppliers in the market right now, reckons Moneyfacts, the financial data provider.

Don't use credit cards for loans

If you prefer to go down the credit-card route, be prepared for a nasty surprise on interest rates. Unlike the highly competitive consumer market, few business credit-card providers offer 0% introductory rates. Instead, you will pay their full interest rate from the word go. Rates vary from around 13% a year at the cheapest end of the market to more than 30% or 40%.

Avoid these costs by paying the bill in full every month. All card providers offer an interest-free period after spending, giving you a chance to pay the bill before charges accumulate. Looking for a longer period makes sense the most generous providers offer between 50 and 60 days' grace.

While it's definitely a good idea to look for a cheap rate on company credit cards (and you should compare other charges, such as annual fees, too), bear in mind that this is not a good way to borrow on behalf of the company. Your account should be for managing small amounts of spending in a convenient way. If you consistently rack up large sums on the card that you don't pay off, interest charges will accumulate quickly.

As with pre-paid cards, corporate credit cards allow you to set different types of control, but think carefully about who can access the account and monitor statements carefully. Moneyfacts' top picks for corporate credit cards include Capital on Tap, Metro Bank, HSBC and Clydesdale Bank. Another option is Barclaycard's Cashback business credit card unlike most corporate accounts, it offers cashback on spending.

The best savings accounts for SMEs

The Bank of England's decision to raise interest rates last week should prompt small-business owners to look at what their spare cash is currently earning. Many businesses hold substantial amounts of rainy-day cash or funds earmarked for investment in corporate savings accounts that pay trifling interest rates. In fact, 63% of small businesses are earning no interest at all on their savings, according to research published earlier this summer by challenger bank Aldermore.

As interest rates rise, even by small increments, so the cost of missing out on such returns will increase. Cambridge & Counties Bank currently pays 1.5% a year, as long as you're happy to give three months' notice of withdrawals. Among the better-known providers, both Nationwide and Virgin Money pay around 1% a year the latter is an instant-access account. You may be able to do even better by tying up your cash for longer, if this is an option for you. For example, Hampshire Trust Bank offers 1.85% on its two-year business bond, while Virgin Money offers 1.75% on its two-year fixed-rate account.

Once the dust has settled on last week's interest-rate rise, make it a priority to find the best home for your savings. If your current provider isn't passing on the increase, look for a better deal elsewhere.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.